Sorry SMRT but you’ve just lost millions to ComfortDelGro

Although an actual yield projection is not yet determined, the Down Town Line (DTL) could achieve a shorter breakeven period and ramp up ridership faster as compared to the North East Line (NEL) and Circle Line (CCL), says CIMB.

“[The rosy growth prospect is based on the fact that] DTL is built in existing residential and commercial estates, whereas the CCL, for instance, was built ahead of demand,” noted transportation analyst Lee Wen Ching at CIMB.

The tender to operate DTL, which is expected to start running in 2014 was awarded to SBS Transit, ComfortDelGro (CD)’s 75%-owned subsidiary. Having won the tender, the following are the growth opportunities which await CD, according to Ms. Lee:

First, ridership growth could be boosted from FY14 onwards when the DTL starts running. Management believes in stronger ridership for DTL and faster breakeven than the Circle Line (CCL), as it is built in existing residential and commercial estates, as opposed to CCL which had been built ahead of demand.

Second, the DTL introduces new rental opportunities, with more than four times the gross commercial space of CD’s North East Line. Rentals typically come with higher operating margins than train operations. For instance, SMRT’s rental margins are 77% vs. its train operations’ 21%.

Third, CD will not bear significant capex as LTA owns the assets under the new financing framework, freeing up its balance sheet for other investment opportunities.

The analyst however said that the benefits from the DTL will only materialise from FY14.

“Over the next two years, CD will incur higher operating expenses as it ramps up operations ahead of the commissioning of DTL. As such, CD may need to endure a margin squeeze before it can reap the fruits of this contract,” Ms. Lee said.

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